Pick your poison: Inflation or recession

When King Louis XV of France famously said, “After me, the deluge,” he at least believed his profligate failure theater wouldn’t cause the deluge until after he was gone. The same cannot be said for Treasury Secretary Janet Yellen and the bipartisan political class that is selling us into a permanent debt and affordability crisis rightnow.

There is nowhere to run because time is already up.

The Treasury Department this year will have auctioned off more treasury notes than during any other year in history, likely topping the 2020 record. With less than three weeks left in the year, the Wall Street Journal reports the Treasury has already actioned off $20.8 trillion in notes — just shy of the $21 trillion auctioned in 2020.

Today, the gross debt has more than doubled and annual interest on the debt costs five times what it did just 12 years ago.

These numbers are unconscionable. Despite less than 4% unemployment, we are issuing as much new debt as we did during the lockdowns, which catalyzed the point of no return in the debt crisis.

What does this mean in the real world? To offload this much debt servicing on the private market, the Treasury will need to offer higher yields for private banks and foreign countries to continue buying our debt. That will require exponentially more money printing and continue to crush consumers with core price inflation regardless of the price of oil.

Why the monetary manipulation game is over

For years, our government was able to service debt on the cheap — growing government without inducing inflation — because U.S. Treasurys were regarded as good as cash and were in high demand. But today the government has more to auction than natural demand will buy.

Right now, the market is predicting the Federal Reserve will cut rates next year under the false pretense that it has defeated inflation. In reality, the board of governors can set the federal funds rate as low as it wants, but if the governors continue to spend this much money and service this much debt, the market itself will naturally drive up yields to draw enough investors willing to buy Treasurys. This means first-time home buyers will continue to face elevated mortgage rates at a time when housing prices are still near record highs.

For example, on Monday, the Fed was forced to sell $37 billion worth of 10-year notes for close to 4.3%, which was a “tail” of 1.4 basis points. When the yield is higher than expected, it’s called a tail, and when it’s lower, it’s called a “stop-through.” Auctions that meet expectations are said to be “on the screws.”

The three-year auction also went badly, with low demand from foreign investors. We already saw how the last 30-year auction was a disastrous tail, but even with the shorter-term 10-year notes, the trend has been troubling. Since the end of 2021, just four of the 24 10-year auctions have been stop-throughs, while 20 of them have been tails.

The declining demand is driven by the drop in foreign investors. China no longer wants to buy our debt. China’s share of holding in U.S. Treasurys hit a 14-year low this year, down 40% from a decade ago. Japan, which has long been the largest holder of U.S. debt, now owns the lowest percentage of marketable Treasurys on record.

“We appreciate and welcome your concluding that the United States is such a safe haven because we appreciate your investment in U.S. treasuries,” Biden told then Chinese Premier Wen Jiabao in Beijing. “And very sincerely, I want to make clear that you have nothing to worry about in terms of their — their viability.”

Well, that was back in the good old days when interest on the debt was $230 billion and the gross federal debt was $14.5 trillion. Today, the gross debt has more than doubled and annual interest on the debt costs five times what it did just 12 years ago.

One can only imagine the sorts of favors the Biden administration will have to sell to China along with those Treasury auctions. Given that roughly one-third of our gross debt is set to mature next year, the size of Treasury auctions in 2024 is slated to be 23% larger than this year. According to the CBO, outlays for the first two months of this fiscal year are already outpacing last year’s record numbers by 17%.

This is the dirty little secret on how the Federal Reserve lost control over the economy. The Fed can no longer rely on tinkering with the federal funds rates to thread the needle between economic growth and inflation.

Despite the drop in oil prices — which is due primarily to decreased demand stemming from an economic slowdown — prices generally have not fallen. High prices are here to stay as long as the Fed continues to print money — and print it must.

Not just a federal balance sheet problem

The average home mortgage payment is now $3,322, nearly twice what it was when Biden took office. Default on credit card loans from small lenders is now at 7.51%, higher than during the 2008 financial crisis or even COVID.

The Fed might be celebrating that prices are not rising as quickly as before, but it is astounding how vital consumer prices are maintaining record high levels given that oil prices have plummeted. The November CPI report still showed certain vital services surging above headline numbers:

  • Car insurance +19.2%
  • Transportation +10.1%
  • Car repairs +8.5%
  • Rent +6.9%
  • Homes +6.7%
  • Food away from home +5.3%
  • Electricity +3.4%

As a result of the consumer strain from the past two years, Americans are broke. Fidelity, the largest holder of 401(K) funds, reports that Americans have been increasingly tapping into their retirement accounts to afford living expenses. The percentage of account holders who took a “hardship withdrawal” from their 401(K)s in 2023 was 2.3%, up from 1.8% last year. The number of Americans taking loans from retirement accounts also rose from 2.4% to 2.8% during the third quarter of this year.

Biting inflation along with the drop in the stock market have depleted the savings and assets of most Americans. According to a recent Federal Reserve report, household net worth fell by $1.3 trillion from July to September. The only time we typically see net worth going backward is during a recession.

And this is the conundrum in which the debt crisis has placed the average American consumer. Endless debt servicing will create long-term sticky price elevation with the only escape being a severe recession. So pick your poison: inflation or recession.

This is no longer about greed and apathy toward the next generation. The continued growth of government is suicide for this generation. The deluge is upon us now.

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